Spotlight on APAC real estate
How has COVID-19 expedited trends?
- The re-routing of supply chains out of China will likely pick up pace. Focus on logistics and the high-end industrial segment.
- Post the outbreak, tenants will review their fixed office space requirements after this involuntary experiment with mobile working. This may not be good news for landlords.
- Tourist-dependent strategies can be fleeting. Investors will likely demand higher returns in the hotel and prime retail segments
While we cannot, at this juncture, quantify the precise economic impact of the COVID-19 on Asia, our base case scenario assumes that the epidemic will be brought under control before 2H 2020, and that an economic rebound will be experienced in the immediate aftermath. The restocking of inventory and pent up demand will support private investments and spending, while policy support should cushion further deteriorations in sentiments. Also, supply chains and flows of people and services will recover, albeit gradually.
As at 24 February 2020, Oxford Economics expects that 2020 global GDP will come in at 2.3%, down from 2.6% in 2019. Asia Pacific as a bloc will take a hit in 2020, with GDP growth falling from 4.3% in 2019 to approximately 3.8%, before staging a comeback in 2021. Obviously the downside risk to our base case is very real, and highly dependent on the magnitude and longevity of this viral outbreak, which remain rather indeterminable as yet. For now, APAC economies with higher export orientation and greater reliance on tourism will feel the impact immediately.
COVID-19: Trade and tourism dependence
4 key trends for APAC property investors
Real estate investors in APAC will be able to glean a few insights from this global health epidemic, and we believe developments in the past month have accelerated and corroborated some emerging themes in the real estate space.
The re-routing of supply chains out of China will likely pick up pace, and even become a priority for many industrialists. The world learned it the hard way in 2019, as the US-China trade flare up resulted in collateral damage for manufacturers with substantial production linkages within China. With severe disruptions in the availability of intermediate production components and not helped by the long (uncertain) period of factory closures, many producers begin to see the need to diversify their exposure to China. While we do not imply that investors should steer clear of the industrial property sector in China, this pandemic does highlight the certainty that low-end manufacturing will start to exit China.
And in place, real estate investors should be looking at logistics that cater to the e-commerce story, and high-end manufacturing and production facilities that continue to be a long term ambition of China's "Made in China 2025" plan.
The trade war in 2019 had investors really excited about the prospects of the industrial real estate markets in South East Asia (SEA), particularly in Vietnam, Indonesia and Malaysia. We do not think that has changed with the COVID-19 issue, but we do want to caveat that manufacturing in SEA is highly dependent on China. The complexity of China's embeddedness in the regional supply chains should not be underestimated. This virus outbreak has already exposed the weakness of many emerging SEA markets which struggle with the potential value chain disruptions. Even if the industrial sector in SEA benefits significantly from spillover effects, intermediate production goods in many instances still rely heavily on China's exports. In the near term, there will not be a total hollowing out from China, as the displacement will take years to be meaningful for many players looking at SEA's industrial sector.
The notion of mobility and flexible working is being truly tested during this COVID-19 crisis. As countries seek to limit human-to-human contagion, many companies have activated business contingency plans and home-based working becomes a daily routine for many workers – previously just a "good-to-have", especially in APAC.
When this COVID-19 outbreak is behind us, we believe many office tenants will review their fixed real estate space requirements, especially if this involuntary experiment with mobile working has resulted in comparable levels of efficiency.
It does not mean that companies will cut down on their office footprint drastically, but it is likely that there might be a stronger inclination towards shared workspaces, which frees up the long term lease commitments of many office tenants. This is not all good news for office landlords but it does suggest that adopting active leasing strategies to capitalize on the workspace of the future may bear fruit for pre-emptive office space owners.
There has already been a general reluctance and aversion towards investing into sectors and markets that rely heavily on tourism and human flow. The GFC and SARS outbreak exposed many hotel and retail investments to huge fluctuations in capital values and income, as the tourist tap seemingly turned off overnight. We can list Japan hospitality as a prime example, where for instance, even the recent allure of the tourism story in Japan could not motivate most conservative investors. Indeed, some sectors are susceptible to even the mildest of disruption in the movement of people across borders, and that could be caused by geopolitical factors, not necessarily a virus outbreak. Once again, the COVID-19 crisis has proven to detractors that tourist-dependent strategies can be fleeting and we expect that investment return requirements in the hotel and prime retail segments may be adjusted upwards.
What can investors expect for US and Europe real estate?
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